Educational Articles

Industry Overview: Packaging and Container

Companies within the Packaging & Container (P&C) industry serve a wide variety of markets, but most rely on the food-and-beverage, household products, and pharmaceutical sectors for the majority of business. Offerings from the industry mainly facilitate the dispensing and protection of products. P&C producers serve a customer base that spans across the globe. Emerging markets, especially in South America and Southeast Asia, have been a particularly attractive growth venue.

Though key end markets are often considered to have defensive characteristics, the industry is not immune to macroeconomic cycles. Consumer spending habits can have an impact on operating results. Cost control is crucial to a company’s earnings performance. Importantly, the success of many players is heavily influenced by energy prices. A good number of products utilize oil-based materials. Nevertheless, P&C stocks have proved to be worthwhile growth-and-income holdings.

Market Environment

As the broader economy goes, so goes the P&C segment. The food-and-beverage and household products sectors account for the biggest portion of overall business. In prosperous times, when consumers and businesses have ample discretionary income, demand for such products, including those viewed as proprietary, is keen, auguring well for P&C sales and earnings.

During periods of economic stress, however, consumer and commercial spending falls and volumes come under pressure. The sales mix, then, will tend to favor simple, low-margined P&C solutions. Companies in this industry that are well diversified usually fair better in an economic contraction. Packaging for private label products, for instance, can lend a degree of stability to results.

Since most of their offerings are commodity-like, companies in the food-and-beverage and household products sectors can keep costs down by using basic, economical packaging and containers. Companies operating in technically specialized markets, such as healthcare and pharmaceuticals, though, require high-end solutions that are tailored to individual products. Hence, related P&C products entail greater research and development outlays, which more often than not can be recouped via premium prices; margins are typically wide.

Cost and Expense Control

Most participants in the industry have to compete on price, especially in the food-and-beverage segment. It’s essential to maintain a disciplined cost structure in order to be successful in the marketplace. Over the years, managements have endeavored to streamline all aspects of the manufacturing process in support of operating margins. They have utilized common efficiency and quality-control measures, including Lean Manufacturing and Six Sigma. Successful implementation of such measures leads to enhanced profitability and cash flow, providing the means for expansion. Volatile petroleum-based material prices can make cost management a challenge. Companies usually try to pass increased material costs on to customers.

Players in this industry require an ample capital base to conduct business, with debt ratios typically in the mid-double-digit range. Nonetheless, depending on capital market conditions, managements will issue common stock and/or use cash to fund continuing operations and expansion.

Operations Abroad

With the sizable North American and West European P&C markets being mature, companies in the industry have looked abroad for growth opportunities. Of note, Latin America and Asia have received a lot of attention, with Brazil, China, and India often being points of interest. Managements have positioned operations in local markets to economically satisfy strong demand. Overseas production assets also offer a natural foreign currency exchange hedge.

Conclusion

As a group, Packaging & Container companies operate across a large portion of the greater economy. They provide a reasonable indication of the health of the business market. Notwithstanding some exceptions, stocks of P&C companies offer a good degree of stability to an investment portfolio. Most have beta coefficients close to that of the market (1.00) and high Stock Price Stability ratings. The companies’ Earnings Predictability marks, with profitability dependent on broader macroeconomic influences, however, are not appealing in every case.

International expansion helps to limit volatility and enhance these companies’ attractiveness as growth-and-income holdings. Most in the industry have a history of respectable dividend payouts.